We continue to see strong resistance near 6950, the FTSE is unable to break decisively above that level. It will require some new fuel to push the index above that level. It's not clear at this stage where the good news will come from. The news was mixed yesterday, positive durable goods orders was balanced by worse than expected jobless claims.

Crude oil has been bouncing back, this is one reason the FTSE has been supported near the high, but the trend is crude oil is down, I expect crude oil to decline below the previous low. As a result stock market are likely to pullback, also because the Top 20 Differential is overbought for the second time. When too many blue chip stocks are too high investors will take profits and the FTSE will go down.

Yet and despite the overbought condition the FTSE is slow to pullback. So far the index looks strong but things can change rapidly. We must not forget that the index is in an uptrend and the target in the next few weeks is above 7000. In an uptrend the dip may not go far therefore in this situation if you are short it is always recommended to take profits early.

Yesterday the FTSE crossed above the previous high of 6950.6 set in December 1999 at the height of the dotcom bubble, but by the close of business the index was below that level closing at 6949.6. It's been a real struggle for the UK index to register a new closing high, even yesterday when we thought the index was about to close at a new all time high, it pulled back in the last minutes of trading to close below its all time high.

The rally was triggered by Janet Yellen who was speaking to the Senate Banking Committee. She pointed out to the need to raise interest rates but not immediately, investors were relieved and the stock market rallied. Her testimony will continue today so expect some more volatility. On the economic front the news was mixed yesterday, consumer confidence in the US was lower than expected and mining stocks were strong after BHP Billiton reported better than expected results.

The new intraday high in the FTSE will attract buyers but if history is any guide buying at these levels could be catastrophic. I remember December 1999 because everyone was talking about the "new economy". Too many people were only interested in trading technology stocks, they thought software, hardware and internet related stocks would make them rich. People were convinced the bull run in tech stocks would go on for many years so they kept buying the dips. They called this revolution the new economy and dumped stocks in the "old economy", stocks from traditional sectors like beverages, food producers...When the Techmark index started to decline in 2000, they bought more stocks, then they bought more again, and again. But the index never recovered, tech stocks were simply overvalued and those who bought them were living in fantasy land. Most people who invested in tech stocks lost money.

Today the situation is slightly different, but the mentality is the same. There is an army of people who think this bull market will go on for years. Optimism is high as it was at the height of the dotcom bubble. The thing is, when optimism is too high the stock market is at risk of a severe correction. This is where we are now, I know optimism is high because the 34-day BTI is overbought. This indicator measures extreme in optimism/pessimism. If history is any guide, the stock market is near the start of a long term decline. We may see higher prices in the next few weeks but the long term picture is grim.

Right now the FTSE is near its all time high like in 1999. Optimism is high, the stock market has been manipulated by the central banks for years but the stimulus program has failed to produce inflation as economists expected. Instead deflation is now the new threat. This is a recipe for disaster.

As expected Euro zone finance ministers agreed to extend Greece's financial rescue package by four months in order to avoid another financial crisis in Europe. Greek banks are on the brink, an emergency funding facility has been agreed, but it is not clear what will happen in four month time. There is still a risk Greece will exit the euro, so markets are cautious this morning.

The euro bounced back on the news yet the EUR/USD is still below last week's high and still in a downtrend. Stock Markets rallied on Friday night but not by a large amount, it seems the Greek news was more or less priced in. The FTSE is near its all-time high recorded in 1999, we will know if the index makes a new high after 8am.

I expect some resistance below 6950 because the Top 20 Differential is overbought and people will take money off the table. I expect some profit taking in the next few days. Despite the Greek deal, uncertainties remain about the future and a Greek exit is still a possibility. In Ukraine people fear the conflict will spread to other parts of the country after an explosion killed two people at a memorial rally 200km from the front line.

As stated on Friday the FTSE is struggling above 6900 and today the index is trading near 6950 in pre-open. This level is an important level because the last time prices traded at this level was in December 1999. Last week the FTSE completed a running triangle. Since the triangle ended at 6820, the index has moved up to 6921 in three waves, then it pulled back to 6858 in three waves and now it's moving up in three waves again. This is the structure of an ending diagonal which is a terminal pattern. Upside is limited.

02/20/2015

The FTSE broke out of a trading range (triangle) but is unable to push higher, this indicates weakness. The attention is on Greece and it's bailout program. Greece submitted a request for a loan extension but Germany rejected the request as this is on different terms from the existing bailouts. The people in Greece are withdrawing money from banks, Greek banks are being kept alive by the ECB, but if the country does not get a loan extension it will run out of money and Greek banks will collapse.

Euro zone finance ministers are meeting today to find a solution. Given that European banks have lent money to Greek banks, I don't think euro zone ministers will pull the plug on Greece. Therefore it is likely a solution will be found. But the market is overbought after the strong run, the Top 20 Differential is above 2.5%. When this indicator is overbought a pullback is imminent. Then we have the 34-day BTI which is overbought too, this is not a timing indicator but when this indicator is overbought it means the FTSE will be trading lower in the next few months. This means upside is limited and downside risk has increased.

Because the FTSE is struggling above 6900 and the Top 20 Differential is overbought, upside is limited and it's time to get ready to go short. Normally when the index breaks out of a triangle the rally should continue. Here we have a running triangle over three week and when the FTSE broke out on 17 February the rally failed and prices are back below 6900. This is what I mean by weakness.

Obviously Greece has been holding the market back, and if EU leaders agree on a loan extension the market will rally. But upside is limited and the next move should be down.